The following pages are excerpted from AutoZone, Inc.'s Annual Report to
Stockholders for the fiscal year ended August 25, 2001.
<< TEN-YEAR REVIEW
5-Year 10-Year
(in thousands, except per share data Compound Compound
and selected operating data) Growth (3) Growth (3) 2001 (2) 2000 1999
INCOME STATEMENT DATA
Net sales 17% 19% $ 4,818,185 $ 4,482,696 $ 4,116,392
Cost of sales, including warehouse and
delivery expenses 2,804,896 2,602,386 2,384,970
Operating, selling, general and
administrative expenses 1,625,598 1,368,290 1,298,327
----------- ----------- -----------
Operating profit 15% 21% 387,691 512,020 433,095
Interest income (expense) - net (100,665) (76,830) (45,312)
----------- ----------- -----------
Income before income taxes 11% 20% 287,026 435,190 387,783
Income taxes 111,500 167,600 143,000
----------- ----------- -----------
Net income 10% 20% $ 175,526 $ 267,590 $ 244,783
=========== =========== ===========
Diluted earnings per share 16% 22% $ 1.54 $ 2.00 $ 1.63
=========== =========== ===========
Adjusted weighted average shares for
diluted earnings per share 113,801 133,869 150,257
=========== =========== ===========
BALANCE SHEET DATA
Current assets $ 1,328,511 $ 1,186,780 $ 1,225,084
Working capital 61,857 152,236 224,530
Total assets 3,432,512 3,333,218 3,284,767
Current liabilities 1,266,654 1,034,544 1,000,554
Debt 1,225,402 1,249,937 888,340
Stockholders' equity 866,213 992,179 1,323,801
SELECTED OPERATING DATA
Number of domestic auto parts stores
at beginning of year 2,915 2,711 2,657
New stores 107 208 245
Replacement stores 16 30 59
Closed stores 3 4 191
Net new stores 104 204 54
Number of domestic auto parts stores
at end of year 3,019 2,915 2,711
Total domestic auto parts store
square footage (000s) 19,377 18,719 17,405
Percentage increase in domestic auto
parts store square footage 4% 8% 5%
Percentage increase in domestic auto
parts comparable store net sales (4) 4% 5% 5%
Average net sales per domestic auto
parts store (000s) $ 1,543 $ 1,517 $ 1,465
Average net sales per domestic auto
parts store square foot $ 240 $ 236 $ 232
Total employment 44,557 43,164 40,483
Gross profit - percentage of sales 41.8% 41.9% 42.1%
Operating profit - percentage of sales 8.0% 11.4% 10.5%
Net income - percentage of sales 3.6% 6.0% 5.9%
Debt-to-capital - percentage 58.6% 55.7% 40.2%
Inventory turnover 2.39 x 2.32 x 2.28 x
Net inventory turnover (5) 9.09 x 7.52 x 7.28 x
Return on average equity 19% 23% 19%
(1) 53 weeks. Comparable store sales, average net sales per store and average
net sales per store square foot for fiscal year 1996 and 1991 have been
adjusted to exclude net sales for the 53rd week.
(2) Fiscal year 2001 operating results include pretax restructuring and
impairment charges of $156.8 million, or $0.84 per share after tax.
(3) Excludes impact of pretax restructuring and impairment charges of $156.8
million in fiscal 2001.
(4) Comparable same store sales for fiscal years 1994 through 2001 are based on
increase in sales for domestic auto parts stores open at least one year.
All other periods are increases in sales for stores open since the
beginning of the preceding fiscal year.
(5) Net inventory turnover is calculated as cost of sales divided by the
average of beginning and ending merchandise inventories less accounts
payable.
Fiscal Year Ended August
1998 1997 1996 (1) 1995 1994 1993 1992 1991 (1)
$ 3,242,922 $ 2,691,440 $ 2,242,633 $ 1,808,131 $ 1,508,029 $ 1,216,793 $ 1,002,327 $ 817,962
1,889,847 1,559,296 1,307,638 1,057,033 886,068 731,971 602,956 491,261
970,768 810,793 666,061 523,440 431,219 344,060 295,701 247,355
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
382,307 321,351 268,934 227,658 190,742 140,762 103,670 79,346
(18,204) (8,843) (1,969) 623 2,244 2,473 818 (7,295)
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
364,103 312,508 266,965 228,281 192,986 143,235 104,488 72,051
136,200 117,500 99,800 89,500 76,600 56,300 41,200 27,900
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
$ 227,903 $ 195,008 $ 167,165 $ 138,781 $ 116,386 $ 86,935 $ 63,288 $ 44,151
=========== =========== =========== =========== =========== =========== =========== ===========
$ 1.48 $ 1.28 $ 1.11 $ 0.93 $ 0.78 $ 0.59 $ 0.43 $ 0.33
=========== =========== =========== =========== =========== =========== =========== ===========
154,070 152,535 151,238 149,302 148,726 147,608 145,940 134,656
=========== =========== =========== =========== =========== =========== =========== ===========
$ 1,117,090 $ 778,802 $ 613,097 $ 447,822 $ 424,402 $ 378,467 $ 279,350 $ 233,439
257,261 186,350 219 30,273 85,373 92,331 72,270 55,807
2,748,113 1,884,017 1,498,397 1,111,778 882,102 696,547 501,048 397,776
859,829 592,452 612,878 417,549 339,029 286,136 207,080 177,632
545,067 198,400 94,400 13,503 4,252 4,458 7,057 7,246
1,302,057 1,075,208 865,582 684,710 528,377 396,613 278,120 204,628
1,728 1,423 1,143 933 783 678 598 538
952 308 280 210 151 107 82 60
12 17 31 29 20 20 14 4
23 3 0 0 1 2 2 0
929 305 280 210 150 105 80 60
2,657 1,728 1,423 1,143 933 783 678 598
16,499 11,611 9,437 7,480 5,949 4,839 4,043 3,458
42% 23% 26% 26% 23% 20% 17% 14%
3% 9% 7% 7% 10% 9% 15% 12%
$ 1,568 $ 1,691 $ 1,702 $ 1,742 $ 1,758 $ 1,666 $ 1,570 $ 1,408
$ 238 $ 253 $ 258 $ 269 $ 280 $ 274 $ 267 $ 246
38,526 28,700 26,800 20,200 17,400 15,700 13,200 11,700
41.7% 42.0% 41.7% 41.5% 41.2% 39.8% 39.8% 39.9%
11.8% 11.9% 12.0% 12.6% 12.6% 11.5% 10.3% 9.7%
7.0% 7.2% 7.5% 7.7% 7.7% 7.1% 6.3% 5.4%
29.5% 15.6% 9.8% 1.9% 0.8% 1.1% 2.5% 3.4%
2.26 x 2.46 x 2.73 x 2.90 x 2.98 x 3.19 x 2.99 x 2.57 x
6.96 x 7.53 x 10.72 x 12.35 x 13.81 x 15.02 x 9.30 x 7.77 x
19% 20% 22% 23% 25% 26% 26% 31%
<< QUARTERLY SUMMARY
(UNAUDITED)
Sixteen
Twelve Weeks Ended Weeks Ended
------------------ -----------
November 18, February 10, May 5, August 25,
(in thousands, except per share data) 2000 2001 2001 2001
---- ---- ---- ----
Net sales $1,063,566 $ 973,999 $ 1,139,957 $ 1,640,663
Increase in comparable store sales 2% 2% 5% 8%
Gross profit $ 445,565 $ 397,333 $ 482,578 $ 687,813(b)
Operating profit 110,768 77,280 127,866(a) $ 71,777(b)(c)
Income before income taxes 87,788 51,736 104,025 43,477
Net income 53,788 31,736 63,525 26,477
Basic earnings per share 0.46 0.28 0.57 0.24
Diluted earnings per share 0.46 0.28 0.56 0.24
Stock price range:
High $ 28.00 $ 29.75 $ 31.98 $ 49.20
Low $ 21.00 $ 24.60 $ 24.37 $ 30.32
Sixteen
Twelve Weeks Ended Weeks Ended
------------------ -----------
November 20, February 12, May 6, August 26,
(in thousands, except per share data) 1999 2000 2000 2000
- ------------------------------------- ---- ---- ---- ----
Net sales $1,006,472 $ 924,164 $ 1,059,415 $ 1,492,645
Increase in comparable store sales 7% 4% 6% 3%
Gross profit $ 421,516 $ 388,427 $ 449,918 $ 620,449
Operating profit 105,748 80,013 126,684 199,575
Income before income taxes 91,144 63,561 109,265 171,220
Net income 56,044 39,061 67,265 105,220
Basic earnings per share 0.40 0.28 0.50 0.85
Diluted earnings per share 0.40 0.28 0.50 0.84
Stock price range:
High $ 29.81 $ 32.31 $ 29.75 $ 29.00
Low $ 23.69 $ 23.25 $ 21.13 $ 21.75
(a) Includes pretax impairment charges of $5.2 million.
(b) Includes pretax inventory writedowns resulting from restructuring
initiatives of $30.1 million.
(c) Includes pretax impairment and restructuring charges of $121.5 million.
<< FINANCIAL REVIEW
The following table sets forth income statement data of the Company expressed as
a percentage of net sales for the periods indicated:
Fiscal Year Ended
-----------------
August 25, August 26, August 28,
2001 2000 1999
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Cost of sales, including warehouse
and delivery expenses 58.2 58.1 57.9
----- ----- -----
Gross profit 41.8 41.9 42.1
Operating, selling, general
and administrative expenses 31.1 30.5 31.6
Restructuring and impairment charges 2.7
----- ----- -----
Operating profit 8.0 11.4 10.5
Interest expense - net 2.1 1.7 1.1
Income taxes 2.3 3.7 3.5
----- ----- -----
Net income 3.6% 6.0% 5.9%
===== ===== =====
RESULTS OF OPERATIONS
For an understanding of the significant factors that influenced the Company's
performance during the past three fiscal years, the following Financial Review
should be read in conjunction with the consolidated financial statements
presented in this annual report.
RESTRUCTURING AND IMPAIRMENT CHARGES
In June 2001, the Company announced initiatives designed to further the creation
of shareholder value and improve return on capital. The effects of restructuring
and impairment charges on income before income taxes of $156.8 million are
summarized as follows and discussed in detail below:
(in thousands)
Income before taxes, excluding restructuring and impairment charges $443,848
Restructuring and impairment charges
Cost of sales:
Inventory rationalization 30,133
Restructuring and impairment charges:
Writedown of assets 87,685
Accrual of lease obligations 29,576
Contract settlements/terminations 6,713
Severance and other 2,715
--------
Total charges 156,822
--------
Income before taxes as reported $287,026
========
As a result of a strategic planning process begun during the third quarter of
2001, the Company established a 15% after-tax return threshold for all current
and future investments. All of the Company's assets, including long-lived assets
and real estate projects in process, were examined to identify those not meeting
the revised hurdle rate. A charge of $5.2 million was recorded in the third
quarter related to abandoned real estate projects in process identified during
this review. The review was completed in the fourth quarter, resulting in
additional restructuring and impairment charges of $151.6 million.
The Company completed its evaluation of store performance and determined that 51
domestic auto parts stores were not meeting acceptable operating targets, which
represents less than two percent of the chain. A reserve of $4.3 million has
been established principally for lease commitments for stores to be closed and a
writedown of $12.5 million has been recorded on the fixed assets in such stores
to reduce carrying value to fair value. The effect of suspending depreciation on
these assets was not material in fiscal 2001. Additionally, a reserve of $2.1
million was established for estimated inventory losses expected in closed
stores. These stores are scheduled to be closed during fiscal 2002. The Company
also evaluated all real estate projects in process and excess properties. These
assets have been written down to the lower of carrying value or fair value less
cost to sell, resulting in charges of $21.0 million for asset writedowns and
$18.3 million for net lease obligations. The Company is actively marketing the
assets held for sale through the use of internal resources and outside agents.
Management intends to dispose of all assets held for sale within the next 12
months.
Additional impairment charges of $25.0 million were taken related primarily to
fixed assets associated with the closure of a supply depot in Memphis,
Tennessee, abandoned or discontinued technology-related assets and assets
abandoned due to reorganization of departments within the Store Support Center.
The Company also established a reserve of $7.0 million principally for lease
commitments associated with the closure of the supply depot and for the office
building recently leased by the Company's ALLDATA subsidiary that will not be
occupied.
The Company has made a decision to sell TruckPro, its heavy-duty truck parts
subsidiary. The Company has engaged an investment banking firm to assist in
identifying a buyer for TruckPro and to facilitate the transaction. Based on
preliminary offers received, the Company has recorded asset writedowns and
contractual obligations aggregating $29.9 million. The Company expects to enter
into a definitive agreement to sell TruckPro before the end of calendar year
2001.
The Company has implemented changes in its marketing and merchandising
strategies. The new strategies include reducing quantities of product on hand in
excess of anticipated needs and decisions to discontinue certain merchandise.
This has resulted in an inventory rationalization charge of $28.0 million.
Discontinued inventory will be recalled and disposed of during the first quarter
of fiscal 2002.
After considering the effect of income taxes, the impact of these restructuring
and impairment charges on net earnings was $95.8 million. The remaining Results
of Operations discussion excludes the restructuring and impairment charges
discussed above because the effects of these charges are not comparable on a
year-over-year basis.
FISCAL 2001 COMPARED TO FISCAL 2000
Net sales for fiscal 2001 increased by $335.5 million or 7.5% over net sales for
fiscal 2000. Same store sales, or sales for domestic auto parts stores opened at
least one year, increased 4%. As of August 25, 2001, the Company had 3,019
domestic auto parts stores in operation compared with 2,915 at August 26, 2000.
Gross profit for fiscal 2001, excluding nonrecurring charges, was $2.0 billion,
or 42.4% of net sales, compared with $1.9 billion, or 41.9% of net sales, for
fiscal 2000. The increase in the gross profit percentage was primarily due to a
shift in sales mix to higher gross margin products in the current year and
higher warranty expense in the prior year.
Operating, selling, general and administrative expenses for fiscal 2001
increased by $130.6 million over such expenses for fiscal 2000 and increased as
a percentage of net sales from 30.5% to 31.1%. The increase in the expense ratio
was primarily due to an increase in insurance, expenses related to strategic
initiatives not included in the restructuring and impairment charges and higher
levels of payroll primarily in the first half of the year.
Net interest expense for fiscal 2001 was $100.7 million compared with $76.8
million for fiscal 2000. The increase in interest expense was due to higher
levels of borrowings.
AutoZone's effective income tax rate was 38.8% of pre-tax income for fiscal 2001
and 38.5% for fiscal 2000.
FISCAL 2000 COMPARED TO FISCAL 1999
Net sales for fiscal 2000 increased by $366.3 million or 8.9% over net sales for
fiscal 1999. Same store sales, or sales for domestic auto parts stores opened at
least one year, increased 5%. As of August 26, 2000, the Company had 2,915
domestic auto parts stores in operation compared with 2,711 at August 28, 1999.
Gross profit for fiscal 2000 was $1.9 billion, or 41.9% of net sales, compared
with $1.7 billion, or 42.1% of net sales, for fiscal 1999. The decrease in gross
profit percentage was primarily due to an increase in warranty expense.
Operating, selling, general and administrative expenses for fiscal 2000
increased by $70.0 million over such expenses for fiscal 1999 and decreased as a
percentage of net sales from 31.6% to 30.5%. The decrease in the expense ratio
was primarily due to leverage of payroll and occupancy costs in acquired stores
coupled with the absence of acquisition related remodeling and remerchandising
activities in fiscal 2000.
Net interest expense for fiscal 2000 was $76.8 million compared with $45.3
million for fiscal 1999. The increase in interest expense was due to higher
levels of borrowings as a result of stock repurchases and higher interest rates.
AutoZone's effective income tax rate was 38.5% of pre-tax income for fiscal 2000
and 36.9% for fiscal 1999. The fiscal 1999 effective tax rate reflects the
utilization of acquired company net operating loss carryforwards.
FINANCIAL MARKET RISK
The Company is exposed to market risk from changes in foreign exchange and
interest rates. To minimize such risks, the Company may periodically use various
financial instruments. All hedging transactions are authorized and executed
pursuant to policies and procedures. The Company does not buy or sell financial
instruments for trading purposes.
On August 27, 2000, the Company adopted Statements of Financial Accounting
Standards Nos. 133, 137 and 138 (collectively "SFAS 133") pertaining to the
accounting for derivatives and hedging activities. SFAS 133 requires the Company
to recognize all derivative instruments in the balance sheet at fair value. The
adoption of SFAS 133 impacts the accounting for the Company's interest rate
hedging program. The Company reduces its exposure to increases in interest rates
by entering into interest rate swap contracts. All of the Company's interest
rate swaps are designated as cash flow hedges.
Upon adoption of SFAS 133, the Company recorded the fair value of the interest
rate swaps in its consolidated balance sheet. Thereafter, the Company has
adjusted the carrying value of the interest rate swaps to reflect their current
fair value. The related gains or losses on these swaps are deferred in
stockholders' equity (as a component of comprehensive income). These deferred
gains and losses are recognized in income in the period in which the related
interest rate payments being hedged have been recognized in expense. However, to
the extent that the change in value of an interest rate swap contract does not
perfectly offset the change in the interest rate payments being hedged, that
ineffective portion is immediately recognized in income.
At August 25, 2001, and August 26, 2000, the fair value of the Company's debt
was estimated at $1.21 billion and $1.20 billion, respectively, based on the
market value of the debt at those dates. Such fair value is less than the
carrying value of debt at August 25, 2001, by $17.3 million and at August 26,
2000, by $47.1 million. The Company had $730.4 million of variable-rate debt
outstanding at August 25, 2001, and $909.9 million at August 26, 2000. At these
borrowing levels, a one percentage point increase in interest rates would have
had an unfavorable impact on the Company's pre-tax earnings and cash flows of
$6.6 million in 2001 and $8.3 million in 2000. The primary interest rate
exposure on variable-rate debt is based on the London Interbank Offered Rate
(LIBOR).
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital requirements have been the funding of its
continued new store expansion program, inventory requirements and, more
recently, stock repurchases. The Company has opened or acquired 1,596 net new
domestic auto parts stores from the beginning of fiscal 1997 to August 25, 2001.
Cash flow generated from store operations provides the Company with a
significant source of liquidity. Net cash provided by operating activities was
$458.9 million in fiscal 2001, $513.0 million in fiscal 2000 and $311.7 million
in fiscal 1999.
The Company invested $169.3 million in capital assets in fiscal 2001. In fiscal
2000, the Company invested $249.7 million in capital assets. In fiscal 1999, the
Company invested $428.3 million in capital assets, including approximately $108
million for real estate and real estate leases purchased from Pep Boys. In
fiscal 2001, the Company opened 107 new auto parts stores in the U.S. and 8 in
Mexico, replaced 16 U.S. stores and closed 3 U.S. stores. In addition, the
Company operated 49 TruckPro stores. Construction commitments totaled
approximately $24 million at August 25, 2001.
The Company's new store development program requires working capital,
predominantly for inventories. Historically, the Company has negotiated extended
payment terms from suppliers, minimizing the working capital required by
expansion. The Company believes that it will be able to continue financing much
of its inventory growth through favorable payment terms from suppliers, but
there can be no assurance that the Company will be successful in obtaining such
terms.
The Company maintains $1.05 billion of revolving credit facilities with a group
of banks. Of the $1.05 billion, $400 million expires in May 2002. The remaining
$650 million expires in May 2005. The 364-day facility expiring in May 2002
includes a renewal feature as well as an option to extend the maturity date of
then-outstanding debt by one year. The credit facilities exist largely to
support commercial paper borrowings and other short-term unsecured bank loans.
Outstanding commercial paper and short-term unsecured bank loans at August 25,
2001, of $400.4 million are classified as long-term as the Company has the
ability and intention to refinance them on a long-term basis. The rate of
interest payable under the credit facilities is a function of LIBOR, the lending
bank's base rate (as defined in the agreement) or a competitive bid rate at the
option of the Company. The Company has agreed to observe certain covenants under
the terms of its credit agreements, including limitations on total indebtedness,
restrictions on liens and minimum fixed charge coverage.
During fiscal year 2001, the Company entered into two unsecured bank term loans
totaling $315 million with a group of banks. Of the $315 million, $115 million
matures in December 2003 and $200 million matures in May 2003. The rate of
interest payable is a function of LIBOR or the bank's base rate (as defined in
the agreement) at the option of the Company.
In May 2001, the Company issued $150 million of 7.99% Senior Notes due April
2006, in a private debt placement. The Senior Notes contain certain covenants
limiting total indebtedness and liens. Interest is payable semi-annually.
Subsequent to year-end, in September 2001, the Company announced Board approval
to repurchase up to $250 million of common stock in the open market. This is in
addition to the $1.45 billion previously authorized as of August 25, 2001. From
January 1998 to August 25, 2001, the Company had repurchased approximately $1.2
billion of common stock. The impact of the stock repurchase program in fiscal
2001 was an increase in earnings per share of $0.05. Subsequent to year-end, the
Company repurchased two million shares in settlement of certain equity
instrument contracts at an average cost of $28.61 per share.
The Company anticipates that it will rely primarily on internally-generated
funds to support a majority of its capital expenditures, working capital
requirements and stock repurchases. The balance will be funded through
borrowings. The Company anticipates that it will be able to obtain such
financing in view of its credit rating and favorable experiences in the debt
market in the past.
INFLATION
The Company does not believe its operations have been materially affected by
inflation. The Company has been successful, in many cases, in mitigating the
effects of merchandise cost increases principally through economies of scale
resulting from increased volumes of purchases, selective forward buying and the
use of alternative suppliers.
SEASONALITY AND QUARTERLY PERIODS
The Company's business is somewhat seasonal in nature, with the highest sales
occurring in the summer months of June through August, in which average weekly
per store sales historically have been about 15% to 25% higher than in the
slower months of December through February.
Each of the first three quarters of AutoZone's fiscal year consists of twelve
weeks and the fourth quarter consists of sixteen weeks. Because the fourth
quarter contains the seasonally high sales volume and consists of sixteen weeks,
compared to twelve weeks for each of the first three quarters, the Company's
fourth quarter represents a disproportionate share of the annual net sales and
net income. The fourth quarter of fiscal 2001, excluding nonrecurring charges,
represented 34.1% of annual net sales and 43.9% of net income; the fourth
quarter of fiscal 2000 represented 33.3% of annual net sales and 39.3% of net
income. Fiscal year 2002 will consist of 53 weeks, with the fiscal fourth
quarter having 17 weeks.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
(SFAS 142). Under SFAS 142, goodwill amortization ceases when the new standard
is adopted. The new rule also requires an initial goodwill impairment assessment
in the year of adoption and annual impairment tests thereafter. The Company is
permitted and has elected to adopt this Statement effective August 26, 2001.
Application of the nonamortization provisions of the Statement is expected to
result in an increase in income before income taxes of $8.6 million per year. No
impairment loss is expected from the initial goodwill impairment test.
FORWARD-LOOKING STATEMENTS
Certain statements contained in the Financial Review and elsewhere in this
annual report are forward-looking statements. These statements discuss, among
other things, expected growth, domestic and international development and
expansion strategy, business strategies and future performance. These
forward-looking statements are subject to risks, uncertainties and assumptions,
including without limitation, competition, product demand, domestic and
international economies, the ability to hire and retain qualified employees,
consumer debt levels, inflation, war and the prospect of war, including
terrorist activity, and availability of commercial transportation. Actual
results may materially differ from anticipated results. For more information,
please see the Risk Factors section of the Company's most recent Form 10-K as
filed with the Securities and Exchange Commission.
<< CONSOLIDATED STATEMENTS OF INCOME
Year Ended (52 Weeks)
---------------------
August 25, August 26, August 28,
(in thousands, except per share data) 2001 2000 1999
---------- ---------- ----------
Net sales $4,818,185 $4,482,696 $4,116,392
Cost of sales, including warehouse and delivery expenses 2,804,896 2,602,386 2,384,970
Operating, selling, general and administrative expenses 1,498,909 1,368,290 1,298,327
Restructuring and impairment charges 126,689
---------- ---------- ----------
Operating profit 387,691 512,020 433,095
Interest expense-net 100,665 76,830 45,312
---------- ---------- ----------
Income before income taxes 287,026 435,190 387,783
Income taxes 111,500 167,600 143,000
---------- ---------- ----------
Net income $ 175,526 $ 267,590 $ 244,783
========== ========== ==========
Weighted average shares for basic earnings per share 112,834 132,945 149,014
Effect of dilutive stock equivalents 967 924 1,243
---------- ---------- ----------
Adjusted weighted average shares for diluted earnings per share 113,801 133,869 150,257
========== ========== ==========
Basic earnings per share $ 1.56 $ 2.01 $ 1.64
---------- ---------- ----------
Diluted earnings per share $ 1.54 $ 2.00 $ 1.63
---------- ---------- ----------
See Notes to Consolidated Financial Statements.
<< CONSOLIDATED BALANCE SHEETS
August 25, August 26,
(in thousands, except per share data) 2001 2000
----------- -----------
ASSETS
Current assets
Cash and cash equivalents $ 7,286 $ 6,969
Accounts receivable 19,135 21,407
Merchandise inventories 1,242,896 1,108,978
Prepaid expenses 18,426 30,214
Deferred income taxes 40,768 19,212
----------- -----------
Total current assets 1,328,511 1,186,780
Property and equipment
Land 492,287 458,217
Buildings and improvements 1,182,880 1,149,900
Equipment 505,282 484,967
Leasehold improvements and interests 116,639 117,452
Construction in progress 75,223 109,840
----------- -----------
2,372,311 2,320,376
Less accumulated depreciation and amortization 661,868 561,936
----------- -----------
1,710,443 1,758,440
Other assets
Cost in excess of net assets acquired, net of accumulated amortization
of $32,186 in 2001 and $24,192 in 2000 305,390 324,494
Deferred income taxes 80,593 52,182
Other assets 7,575 11,322
----------- -----------
393,558 387,998
----------- -----------
$ 3,432,512 $ 3,333,218
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 945,666 $ 788,825
Accrued expenses 292,153 227,682
Income taxes payable 28,835 18,037
----------- -----------
Total current liabilities 1,266,654 1,034,544
Long-term debt 1,225,402 1,249,937
Other liabilities 74,243 56,558
Commitments and contingencies (See notes I and J)
Stockholders' equity
Preferred stock, authorized 1,000 shares; no shares issued
Common stock, par value $.01 per share, authorized 200,000 shares;
119,518 shares issued and 109,408 shares outstanding in 2001 and
154,328 shares issued and 121,510 shares outstanding in 2000 1,195 1,543
Additional paid-in capital 295,629 301,901
Notes receivable from officers (1,911) (4,463)
Retained earnings 825,196 1,564,118
Accumulated other comprehensive loss (5,308) (5)
Treasury stock, at cost (248,588) (870,915)
----------- -----------
Total stockholders' equity 866,213 992,179
----------- -----------
$ 3,432,512 $ 3,333,218
=========== ===========
See Notes to Consolidated Financial Statements.
<< CONSOLIDATED STATEMENTS
OF CASH FLOWS
Year Ended (52 Weeks)
---------------------
August 25, August 26, August 28,
(in thousands) 2001 2000 1999
--------- --------- ---------
Cash flows from operating activities:
Net income $ 175,526 $ 267,590 $ 244,783
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of property and equipment 122,576 117,932 122,221
Amortization of intangible and other assets 8,757 8,868 6,310
Deferred income tax expense (benefit) (46,981) 39,338 42,929
Restructuring and impairment charges 156,822
Income tax benefit realized from exercise of options 13,495 4,050 4,300
Net change in accounts receivable and prepaid expenses 10,562 7,764 20,399
Net change in merchandise inventories (164,164) 20,715 (201,553)
Net increase in accounts payable and accrued expenses 187,801 61,382 70,304
Net change in income taxes payable and receivable 10,798 4,966 13,367
Net change in other assets and liabilities (16,255) (19,645) (11,392)
--------- --------- ---------
Net cash provided by operating activities 458,937 512,960 311,668
Cash flows from investing activities:
Capital expenditures and real estate purchased from Pep Boys (169,296) (249,657) (428,315)
Disposal of capital assets 44,601 11,771
Notes receivable from officers 2,552 (4,463)
--------- --------- ---------
Net cash used in investing activities (122,143) (242,349) (428,315)
Cash flows from financing activities:
Net increase (decrease) in commercial paper (381,853) 234,300 228,000
Proceeds from debentures/notes 465,000 148,913
Net increase (decrease) in unsecured bank loans (105,000) 120,000 (34,050)
Net proceeds from sale of common stock 48,410 5,455 7,266
Purchase of treasury stock (366,097) (639,925) (234,602)
Other 3,063 10,610 407
--------- --------- ---------
Net cash provided by (used in) financing activities (336,477) (269,560) 115,934
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 317 1,051 (713)
Cash and cash equivalents at beginning of year 6,969 5,918 6,631
--------- --------- ---------
Cash and cash equivalents at end of year $ 7,286 $ 6,969 $ 5,918
========= ========= =========
Supplemental cash flow information:
Interest paid, net of interest cost capitalized $ 97,968 $ 74,745 $ 41,533
Income taxes paid $ 100,702 $ 123,036 $ 93,073
See Notes to Consolidated Financial Statements.
<< CONSOLIDATED STATEMENTS
OF STOCKHOLDERS' EQUITY
Accumulated
Additional Other
Common Paid-in Notes Retained Comprehensive Treasury
(in thousands) Stock Capital Receivable Earnings Loss Stock Total
----- ------- ---------- -------- ---- ----- -----
Balance at August 29, 1998 $ 1,530 $277,528 $ $1,051,745 $ $ (28,746) $1,302,057
Net income 244,783 244,783
Foreign currency translation adjustment (3) (3)
----------
COMPREHENSIVE INCOME 244,780
Purchase of 8,657 shares of treasury stock (234,602) (234,602)
Sale of 924 shares of common stock under
stock option and stock purchase plans 10 7,256 7,266
Tax benefit of exercise of stock options 4,300 4,300
-------- -------- --------- ---------- -------- --------- ----------
Balance at August 28, 1999 1,540 289,084 1,296,528 (3) (263,348) 1,323,801
Net income 267,590 267,590
Foreign currency translation adjustment (2) (2)
---------
COMPREHENSIVE INCOME 267,588
Issuance of notes receivable from officers (4,463) (4,463)
Purchase of 23,208 shares of treasury stock 3,315 (607,567) (604,252)
Sale of 361 shares of common stock under
stock option and stock purchase plans 3 5,452 5,455
Tax benefit of exercise of stock options 4,050 4,050
-------- --------- --------- ---------- -------- --------- ----------
Balance at August 26, 2000 1,543 301,901 (4,463) 1,564,118 (5) (870,915) 992,179
Net income 175,526 175,526
Foreign currency translation adjustment 294 294
Unrealized loss on interest rate swap contracts (5,597) (5,597)
---------
COMPREHENSIVE INCOME 170,223
Repayments of notes receivable from officers 2,552 2,552
Purchase of 14,345 shares of treasury stock 5,451 (366,097) (360,646)
Retirement of 37,000 shares of treasury stock (370 (71,781) (914,448) 986,599
Sale of 2,061 shares of common stock under
stock option and stock purchase plans 22 46,563 1,825 48,410
Tax benefit of exercise of stock options 13,495 13,495
-------- -------- --------- ---------- -------- --------- ----------
Balance at August 25, 2001 $ 1,195 $295,629 $ (1,911) $ 825,196 $ (5,308) $(248,588) $ 866,213
======== ======== ========= ========== ======== ========= ==========
See Notes to Consolidated Financial Statements.
<< NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
Business: The Company is principally a retailer of light vehicle parts, supplies
and accessories. At the end of fiscal 2001, the Company operated 3,019 domestic
auto parts stores in 42 states and the District of Columbia and 21 auto parts
stores in Mexico. In addition, the Company sells heavy duty truck parts and
accessories through its 49 TruckPro stores in 15 states, light vehicle
diagnostic and repair software through ALLDATA and diagnostic and repair
information through alldatadiy.com.
Fiscal Year: The Company's fiscal year consists of 52 or 53 weeks ending on the
last Saturday in August.
Basis of Presentation: The consolidated financial statements include the
accounts of AutoZone, Inc. and its wholly owned subsidiaries (the Company). All
significant intercompany transactions and balances have been eliminated in
consolidation.
Merchandise Inventories: Inventories are stated at the lower of cost or market
using the last-in, first-out (LIFO) method.
Property and Equipment: Property and equipment is stated at cost. Depreciation
is computed principally by the straight-line method over the following estimated
useful lives: buildings and improvements, 5 to 50 years; equipment, 3 to 10
years; and leasehold improvements and interests, 5 to 15 years. Leasehold
improvements and interests are amortized over the terms of the leases.
Intangible Assets: The cost in excess of fair value of net assets of businesses
acquired is recorded as goodwill and is amortized on a straight-line basis over
40 years. The Company continually evaluates the carrying value of goodwill. Any
impairments would be recognized when the expected future undiscounted operating
cash flows derived from such goodwill is less than its carrying value.
Preopening Expenses: Preopening expenses, which consist primarily of payroll and
occupancy costs, are expensed as incurred.
Advertising Costs: The Company expenses advertising costs as incurred.
Advertising expense, net of vendor rebates, was approximately $20.7 million in
fiscal 2001, $14.4 million in fiscal 2000 and $21.9 million in fiscal 1999.
Warranty Costs: The Company provides the consumer with a warranty on certain
products. Estimated warranty obligations are provided at the time of sale of the
product.
Financial Instruments: The Company has certain financial instruments which
include cash, accounts receivable and accounts payable. The carrying amounts of
these financial instruments approximate fair value because of their short
maturities.
Income Taxes: The Company accounts for income taxes under the liability method.
Deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
Cash Equivalents: Cash equivalents consist of investments with maturities of 90
days or less at the date of purchase.
Use of Estimates: Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent liabilities to prepare these financial statements in
conformity with accounting principles generally accepted in the United States.
Actual results could differ from those estimates.
Earnings Per Share: Basic earnings per share is based on the weighted average
outstanding common shares. Diluted earnings per share is based on the weighted
average outstanding shares adjusted for the effect of common stock equivalents.
Revenue Recognition: The Company recognizes sales revenue at the time the sale
is made.
Impairment of Long-Lived Assets: The Company complies with Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This statement
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Also, in general, long-lived assets and certain identifiable
intangibles to be disposed of are reported at the lower of carrying amount or
fair value less cost to sell.
Derivative Instruments and Hedging Activities: On August 27, 2000, the Company
adopted Statements of Financial Accounting Standards Nos. 133, 137 and 138
(collectively "SFAS 133") pertaining to the accounting for derivatives and
hedging activities. SFAS 133 requires the Company to recognize all derivative
instruments in the balance sheet at fair value. The adoption of SFAS 133 impacts
the accounting for the Company's interest rate hedging program. The Company
reduces its exposure to increases in interest rates by entering into interest
rate swap contracts. All of the Company's interest rate swaps are designated as
cash flow hedges.
Upon adoption of SFAS 133, the Company recorded the fair value of the interest
rate swaps in its consolidated balance sheet. Thereafter, the Company has
adjusted the carrying value of the interest rate swaps to reflect their current
fair value. The related gains or losses on these swaps are deferred in
stockholders' equity (as a component of comprehensive income). These deferred
gains and losses are recognized in income in the period in which the related
interest rate payments being hedged have been recognized in expense. However, to
the extent that the change in value of an interest rate swap contract does not
perfectly offset the change in the interest rate payments being hedged, that
ineffective portion is immediately recognized in income.
Recently Issued Accounting Standards: In June 2001, the Financial Accounting
Standards Board issued SFAS No. 142, "Goodwill and Other Intangible Assets."
Under SFAS 142, goodwill amortization ceases when the new standard is adopted.
The new rules also require an initial goodwill impairment assessment in the year
of adoption and annual impairment tests thereafter. The Company is permitted and
has elected to adopt this Statement effective August 26, 2001, the first day of
fiscal 2002. Application of the non-amortization provisions of SFAS No. 142 is
expected to result in an increase in net income of $5.3 million ($0.05 per
share) per year. During fiscal 2002, the Company will perform the first of the
required impairment tests of goodwill. No impairment loss is expected from the
initial goodwill impairment test.
Reclassifications: Certain prior year amounts have been reclassified to conform
with the fiscal 2001 presentation.
NOTE B - RESTRUCTURING AND IMPAIRMENT CHARGES
As a result of a strategic planning process begun during the third quarter of
2001, the Company established a 15% after-tax return threshold for all current
and future investments. All of the Company's assets, including long-lived assets
and real estate projects in process, were examined to identify those not meeting
the revised hurdle rate. A total charge of $156.8 million was recorded during
fiscal 2001 for the following (in thousands):
Writedown of assets $ 87,685
Inventory rationalization 30,133
Accrual of lease obligations 29,576
Contract settlements/terminations 6,713
Severance and other 2,715
---------
$ 156,822
=========
The Company evaluated store performance and determined that 51 domestic auto
parts stores were not meeting acceptable operating targets, which represents
less than two percent of the chain. A reserve of $4.3 million has been
established principally for lease commitments for stores to be closed and a
writedown of $12.5 million has been recorded on the fixed
assets in such stores to reduce carrying value to fair value. The effect of
suspending depreciation on these assets was not significant in fiscal 2001.
Additionally, a reserve of $2.1 million was established for estimated inventory
losses expected in closed stores, which is reflected in cost of sales. These
stores are scheduled to be closed during fiscal 2002. The Company also evaluated
all real estate projects in process and excess properties. These assets have
been written down to the lower of carrying value or fair value less cost to
sell, resulting in charges of $21.0 million for asset writedowns and $18.3
million for net lease obligations. The Company is actively marketing the assets
held for sale through the use of internal resources and outside agents.
Management intends to dispose of all assets held for sale within the next 12
months.
Additional impairment charges of $25.0 million were taken related primarily to
fixed assets associated with the closure of a supply depot in Memphis,
Tennessee, abandoned or discontinued technology-related assets and assets
abandoned due to reorganization of departments within the Store Support Center.
The Company also established a reserve of $7.0 million principally for lease
commitments associated with the closure of the supply depot and for the office
building recently leased by the Company's ALLDATA subsidiary that will not be
occupied.
The Company has made a decision to sell TruckPro, its heavy-duty truck parts
subsidiary. The Company has engaged an investment banking firm to assist in
identifying a buyer for TruckPro and to facilitate the transaction. Based on
preliminary offers received, the Company has recorded asset writedowns and
contractual obligations aggregating $29.9 million. The Company expects to enter
into a definitive agreement to sell TruckPro before the end of calendar year
2001.
The Company has implemented changes in its marketing and merchandising
strategies. The new strategies include reducing quantities of product on hand in
excess of anticipated needs and decisions to discontinue certain merchandise.
This has resulted in an inventory rationalization charge of $28.0 million. This
charge is reflected in cost of sales. Discontinued inventory will be recalled
and disposed of during the first quarter of fiscal 2002.
NOTE C - ACCRUED EXPENSES
Accrued expenses consist of the following:
August 25, August 26,
(in thousands) 2001 2000
-------------- ---- ----
Medical and casualty insurance claims $ 70,719 $ 54,970
Accrued compensation and related payroll taxes 49,589 49,137
Property and sales taxes 45,030 33,341
Accrued sales and warranty returns 63,467 50,182
Other 63,348 40,052
---------- ----------
$ 292,153 $ 227,682
========== ==========
NOTE D - INCOME TAXES
At August 25, 2001, the Company had federal tax net operating loss carryforwards
(NOLs) of approximately $35.6 million that expire in years 2007 through 2017.
These carryforwards resulted from the Company's acquisition of ALLDATA
Corporation during fiscal 1996, and Chief Auto Parts Inc. and ADAP, Inc. (which
had been doing business as "Auto Palace") in fiscal 1998. The use of the federal
tax NOLs is limited to future taxable earnings of these companies and is subject
to annual limitations. A valuation allowance of $8.7 million in fiscal 2001 and
$9.3 million in fiscal 2000 relates to these carryforwards. In addition, the
Company has state tax NOLs that expire in years 2002 through 2020. These state
tax NOLs also resulted from the Company's acquisition of ALLDATA Corporation,
Chief Auto Parts Inc. and ADAP, Inc. The use of the NOLs is limited to future
taxable earnings of these companies and is subject to annual limitations. A
valuation allowance of $6.1 million in fiscal 2001 relates to these
carryforwards.
The provision for income tax expense consists of the following:
Year Ended
---------------------------------------------
August 25, August 26, August 28,
(in thousands) 2001 2000 1999
- -------------- ---- ---- ----
Current:
Federal $ 144,538 $ 119,259 $ 90,018
State 13,943 9,003 10,053
---------- ---------- ----------
158,481 128,262 100,071
Deferred:
Federal (42,380) 35,762 38,999
State (4,601) 3,576 3,930
---------- ---------- ----------
(46,981) 39,338 42,929
---------- ---------- ----------
$ 111,500 $ 167,600 $ 143,000
========== ========== ==========
Significant components of the Company's deferred tax assets and liabilities are
as follows:
August 25, August 26,
(in thousands) 2001 2000
- -------------- ---- ----
Deferred tax assets:
Net operating loss and credit carryforwards $ 25,226 $ 20,191
Insurance reserves 22,804 17,089
Warranty reserves 23,684 19,807
Accrued vacation 5,638 5,092
Closed store reserves 25,585 20,315
Inventory reserves 14,256 4,138
Property and equipment 3,391
Other 22,030 12,033
---------- ----------
142,614 98,665
Less valuation allowance (14,792) (9,297)
---------- ----------
127,822 89,368
Deferred tax liabilities:
Property and equipment 11,062
Property taxes 6,461 6,912
---------- ----------
6,461 17,974
---------- ----------
Net deferred tax assets $ 121,361 $ 71,394
========== ==========
A reconciliation of the provision for income taxes to the amount computed by
applying the federal statutory tax rate of 35% to income before income taxes is
as follows:
August 25, August 26, August 28,
(in thousands) 2001 2000 1999
- -------------- ---- ---- ----
Expected tax at statutory rate $ 100,459 $ 152,317 $ 135,724
State income taxes, net 6,072 8,176 9,089
Other 4,969 7,107 (1,813)
---------- ---------- ----------
$ 111,500 $ 167,600 $ 143,000
========== ========== ==========
NOTE E - FINANCING ARRANGEMENTS
The Company's long-term debt as of August 25, 2001, and August 26, 2000,
consists of the following:
August 25, August 26,
(in thousands) 2001 2000
- -------------- ---- ----
6% Notes due November 2003 $ 150,000 $ 150,000
6.5% Debentures due July 2008 190,000 190,000
7.99% Notes due April 2006 150,000
Bank term loan due December 2003, interest
rate of 4.95% at August 25, 2001 115,000
Bank term loan due May 2003, interest rate of 4.69% 200,000
Commercial paper, weighted average interest
rate of 3.9% at August 25, 2001,
and 6.8% at August 26, 2000 385,447 767,300
Unsecured bank loans 15,000 120,000
Other 19,955 22,637
---------- ----------
$1,225,402 $1,249,937
========== ==========
The Company maintains $1.05 billion of revolving credit facilities with a group
of banks. Of the $1.05 billion, $400 million expires in May 2002. The remaining
$650 million expires in May 2005. The 364-day facility expiring in May 2002
includes a renewal feature as well as an option to extend the maturity date of
the then-outstanding debt by one year. The credit facilities exist largely to
support commercial paper borrowings and other short-term unsecured bank loans.
Outstanding commercial paper and short-term unsecured bank loans at August 25,
2001, of $400.4 million are classified as long-term as the Company has the
ability and intention to refinance them on a long-term basis. The rate of
interest payable under the credit facilities is a function of the London
Interbank Offered Rate (LIBOR), the lending bank's base rate (as defined in the
agreement) or a competitive bid rate at the option of the Company. The Company
has agreed to observe certain covenants under the terms of its credit
agreements, including limitations on total indebtedness, restrictions on liens
and minimum fixed charge coverage.
During fiscal 2001, the Company entered into two unsecured bank term loans
totaling $315 million with a group of banks. Of the $315 million, $115 million
matures in December 2003 and $200 million matures in May 2003. The rate of
interest payable is a function of LIBOR or the bank's base rate (as defined in
the agreement) at the option of the Company.
In May 2001, the Company issued $150 million of 7.99% Senior Notes due April
2006, in a private debt placement. The Senior Notes contain covenants limiting
total indebtedness and liens. Interest is payable semi-annually.
All of the Company's debt is unsecured, except for $15 million, which is
collateralized by property. Maturities of long-term debt are $200 million for
fiscal 2003, $265 million for fiscal 2004, $420.4 million for fiscal 2005, $150
million for fiscal 2006 and $190 million thereafter.
Interest costs of $1.4 million in fiscal 2001, $2.8 million in fiscal 2000 and
$2.8 million in fiscal 1999 were capitalized.
The estimated fair value of the 6.5% Debentures and the 6% Notes, which are both
publicly traded, was approximately $174.6 million and $148.1 million,
respectively, based on the estimated market values at August 25, 2001. The
estimated fair value of the 6.5% Debentures and the 6% Notes was approximately
$156.7 million and $136.2 million, respectively, at August 26, 2000. The
estimated fair values of all other long-term borrowings approximate their
carrying values primarily because they are short-term or have variable interest
rates.
NOTE F - STOCK REPURCHASE PROGRAM
As of August 25, 2001, the Board of Directors had authorized the Company to
repurchase up to $1.45 billion of common stock in the open market. In fiscal
2001, the Company repurchased 14.3 million shares of its common stock at an
aggregate cost of $366.1 million. Since fiscal 1998, the Company has repurchased
a total of 47.2 million shares at an aggregate cost of $1.2 billion. At times,
the Company utilizes equity instrument contracts to facilitate its repurchase of
common stock. At August 25, 2001, the Company held equity instrument contracts
that relate to the purchase of approximately 3.9 million shares of common stock
at an average cost of $33.67 per share.
Subsequent to year-end, the Board authorized the repurchase of an additional
$250 million of the Company's common stock in the open market. Additionally in
fiscal 2002, the Company purchased two million shares in settlement of certain
equity instrument contracts outstanding at August 25, 2001, at an average cost
of $28.61 per share.
NOTE G - EMPLOYEE STOCK PLANS
The Company has granted options to purchase common stock to certain employees
and directors under various plans at prices equal to the market value of the
stock on the dates the options were granted. Options are generally exercisable
in a three to seven year period, and generally expire after ten years. A summary
of outstanding stock options is as follows:
Wtd. Avg. Number
Exercise Price of Shares
-------------- ---------
Outstanding August 29, 1998 $ 23.56 9,756,864
Granted 29.23 2,081,125
Exercised 12.87 (596,274)
Canceled 28.43 (741,309)
------------ ----------
Outstanding August 28, 1999 24.95 10,500,406
Granted 25.96 1,960,256
Exercised 7.13 (520,186)
Canceled 28.27 (1,172,854)
------------ ----------
Outstanding August 26, 2000 25.64 10,767,622
Granted 25.53 908,566
Exercised 22.12 (2,135,328)
Canceled 27.16 (1,084,683)
------------ ----------
Outstanding August 25, 2001 $ 26.33 8,456,177
============ ==========
The following table summarizes information about stock options outstanding at
August 25, 2001:
Options Outstanding Options Exercisable
----------------------------- --------------------------
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Range of Exercise Contractual Life Exercise
Exercise Price No. of Options Price (in years) No. of Options Price
-------------- -------------- ----- ---------- -------------- -----
$ 4.86 - $ 24.00 1,950,945 $ 21.17 6.27 606,774 $ 18.34
24.63 - 25.25 2,093,325 25.06 4.19 1,335,640 25.17
25.56 - 27.88 1,956,316 26.82 6.68 515,604 27.04
28.00 - 32.81 1,990,999 30.23 6.70 396,849 29.66
33.31 - 45.53 464,592 34.97 6.82 90,189 34.81
- ------------------ --------- ----------- ---- --------- ----------
$ 4.86 - $ 45.53 8,456,177 $ 26.33 5.98 2,945,056 $ 24.99
================== ========= =========== ==== ========= ==========
Options to purchase 2.9 million shares at August 25, 2001, 3.5 million shares at
August 26, 2000, and 2.4 million shares at August 28, 1999, were exercisable.
Shares reserved for future grants were 5.2 million at August 25, 2001.
Pro forma information is required by SFAS 123, "Accounting for Stock-Based
Compensation." In accordance with the provisions of SFAS 123, the Company
applies APB Opinion 25 and related interpretations in accounting for its stock
option plans and, accordingly, no compensation expense for stock options has
been recognized. If the Company had elected to recognize compensation cost based
on the fair value of the options granted at the grant date as prescribed in SFAS
123, the Company's net income and earnings per share would have been reduced to
the pro forma amounts indicated below. The effects of applying SFAS 123 and the
results obtained through the use of the Black-Scholes option pricing model in
this pro forma disclosure are not necessarily indicative of future amounts. SFAS
123 does not apply to awards prior to fiscal 1996.
Year Ended
----------------------------------------
August 25, August 26, August 28,
(in thousands, except per share data) 2001 2000 1999
------------------------------------- ---- ---- ----
Net income
As reported $ 175,526 $ 267,590 $ 244,783
Pro forma $ 168,581 $ 258,374 $ 234,898
Basic earnings per share
As reported $ 1.56 $ 2.01 $ 1.64
Pro forma $ 1.50 $ 1.95 $ 1.58
Diluted earnings per share
As reported $ 1.54 $ 2.00 $ 1.63
Pro forma $ 1.48 $ 1.93 $ 1.57
The weighted average fair value of the stock options granted during fiscal 2001
was $10.19, during fiscal 2000 was $11.92 and during fiscal 1999 was $12.74. The
fair value of each option granted is estimated on the date of the grant using
the Black-Scholes option pricing model with the following weighted average
assumptions for grants in 2001, 2000 and 1999: expected price volatility of 0.34
to 0.37; risk-free interest rates ranging from 3.75% to 6.18%; and expected
lives between 4.83 and 8.83 years.
Stock options that could potentially dilute basic earnings per share in the
future, that were not included in the fully diluted computation because they
would have been antidilutive, were 7.5 million at August 26, 2000, and 3.6
million at August 28, 1999.
The Company also has an employee stock purchase plan under which all eligible
employees may purchase common stock at 85% of fair market value (determined
quarterly) through payroll deductions. In fiscal 2000, maximum permitted annual
purchases were increased from $4,000 to $15,000 per employee or 10% of
compensation, whichever is less. Under the plan, 0.2 million shares were sold in
fiscal 2001, and 0.3 million shares were sold in each of fiscal 1999 and 2000.
The Company repurchased 0.2 million shares in fiscal years 2001, 2000 and 1999,
respectively, for sale under the plan. A total of 0.8 million shares of common
stock is reserved for future issuance under this plan.
Under the Second Amended and Restated Directors Stock Option Plan each
non-employee director will receive an option to purchase 1,500 shares of common
stock on January 1 of each year. In addition, as long as the non-employee
director owns common stock valued at least equal to five times the value of the
annual fee paid to such director, that director will receive an additional
option to purchase 1,500 shares as of January 1 of each year. New directors
receive options to purchase 3,000 shares plus a grant of an option to purchase a
number of shares equal to the annual option grant, prorated for the time in
service for the year.
Under the Second Amended and Restated Directors Compensation Plan a director may
receive no more than one-half of the annual and meeting fees immediately in
cash, and the remainder of the fees must be taken in either common stock or the
fees deferred in units with value equivalent to the value of share of common
stock as of the grant date ("stock appreciation rights").
NOTE H - PENSION AND SAVINGS PLAN
Substantially all full-time employees are covered by a defined benefit pension
plan. The benefits are based on years of service and the employee's highest
consecutive five-year average compensation. In fiscal 2000, the Company
established a supplemental defined benefit pension plan for highly compensated
employees.
The Company makes annual contributions in amounts at least equal to the minimum
funding requirements of the Employee Retirement Income Security Act of 1974. The
following table sets forth the plan's funded status and amounts recognized in
the Company's financial statements:
August 25, August 26,
(in thousands) 2001 2000
- -------------- ---- ----
Change in benefit obligation:
Benefit obligation at beginning of year $ 66,990 $ 64,863
Service cost 10,339 9,778
Interest cost 5,330 4,523
Plan amendments 2,037
Actuarial losses (gains) 11,437 (12,897)
Benefits paid (2,103) (1,314)
---------- ----------
Benefit obligation at end of year 91,993 66,990
Change in plan assets:
Fair value of plan assets at beginning of year 65,379 54,763
Actual return on plan assets 1,285 2,851
Company contributions 9,652 9,481
Benefits paid (2,103) (1,314)
Administrative expenses (478) (402)
---------- ----------
Fair value of plan assets at end of year 73,735 65,379
Reconciliation of funded status:
Funded status of the plan (underfunded) (18,258) (1,611)
Unrecognized net actuarial losses 17,953 768
Unamortized prior service cost (2,167) (2,686)
---------- ----------
Accrued benefit cost $ (2,472) $ (3,529)
========== ==========
Year Ended
------------------------------------------
August 25, August 26, August 28,
2001 2000 1999
---- ---- ----
Components of net periodic benefit cost:
Service cost $ 10,339 $ 9,778 $ 8,022
Interest cost 5,330 4,523 3,727
Expected return on plan assets (6,555) (5,617) (5,001)
Amortization prior service cost (518) (605) (606)
Recognized net actuarial losses 540 451
---------- ---------- ----------
$ 8,596 $ 8,619 $ 6,593
========== ========== ==========
The actuarial present value of the projected benefit obligation was determined
using weighted average discount rates of 7.5% at August 25, 2001, 8% at August
26, 2000, and 7% at August 28, 1999. The assumed increases in future
compensation levels were generally 5-10% based on age in fiscal 2001, 2000 and
1999. The expected long-term rate of return on plan assets was 9.5% at August
25, 2001, August 26, 2000, and August 28, 1999. Prior service cost is amortized
over the estimated average remaining service lives of the plan participants, and
the unrecognized actuarial gain or loss is amortized over five years.
The Company has also established a defined contribution plan ("401(k) plan")
pursuant to Section 401(k) of the Internal Revenue Code. The 401(k) plan covers
substantially all employees that meet the plan's service requirements. The
Company makes matching contributions, on an annual basis, up to a specified
percentage of employees' contributions as approved by the Board of Directors.
NOTE I - LEASES
A portion of the Company's retail stores, distribution centers and certain
equipment are leased. Most of these leases include renewal options and some
include options to purchase and provisions for percentage rent based on sales.
In addition, some of the leases contain guaranteed residual values.
Rental expense was $100.4 million for fiscal 2001, $95.7 million for fiscal 2000
and $96.2 million for fiscal 1999. Percentage rentals were insignificant.
Minimum annual rental commitments under non-cancelable operating leases are as
follows at the end of fiscal 2001 (in thousands):
Year Amount
---- ------
2002 $ 117,436
2003 107,838
2004 90,370
2005 71,542
2006 58,883
Thereafter 236,199
---------
$ 682,268
=========
NOTE J - COMMITMENTS AND CONTINGENCIES
Construction commitments, primarily for new stores, totaled approximately $24
million at August 25, 2001.
The Company is a defendant in a lawsuit entitled "Coalition for a Level Playing
Field, L.L.C., et. al., v. AutoZone, Inc., et. al.," filed in the U.S. District
Court for the Eastern District of New York in February 2000. The case was filed
by over 100 plaintiffs, which are principally automotive aftermarket warehouse
distributors and jobbers, against eight defendants, which are principally
automotive aftermarket parts retailers. The plaintiffs claim that the defendants
have knowingly received volume discounts, rebates, slotting and other
allowances, fees, free inventory, sham advertising and promotional payments, a
share in the manufacturers' profits, and excessive payments for services
purportedly performed for the manufacturers in violation of the Robinson-Patman
Act. Plaintiffs seek approximately $1 billion in damages (including statutory
trebling) and a permanent injunction prohibiting defendants from committing
further violations of the Robinson-Patman Act and from opening any further
stores to compete with plaintiffs as long as defendants continue to violate the
Act. The Company believes this suit to be without merit and will vigorously
defend against it. The Company and the other defendants filed a motion to
dismiss this action in the fiscal fourth quarter. Subsequently, on October 23,
2001, the court overruled a substantial portion of the defendants' motion. While
the Company is unable to predict the outcome of this case, it currently believes
that the matter will not likely result in liabilities material to the Company's
financial condition or results of operations.
The Company currently, and from time to time, is involved in various other legal
proceedings incidental to the conduct of its business. Although the amount of
liability that may result from these proceedings cannot be ascertained, the
Company does not currently believe that, in the aggregate, these other matters
will result in liabilities material to the Company's financial condition or
results of operations.
The Company is self-insured for workers' compensation, automobile, general and
product liability losses. The Company is also self-insured for health care
claims for eligible active employees. The Company maintains certain levels for
stop loss coverage for each self-insured plan. Self-insurance costs are accrued
based upon the aggregate of the liability for reported claims and an estimated
liability for claims incurred but not reported.
STOCKHOLDERS
AUTOZONE, INC.
We have audited the accompanying consolidated balance sheets of AutoZone, Inc.
as of August 25, 2001 and August 26, 2000, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended August 25, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of AutoZone, Inc. at
August 25, 2001 and August 26, 2000, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
August 25, 2001, in conformity with accounting principles generally accepted in
the United States.
/s/ Ernst & Young, LLP
Memphis, Tennessee
September 21, 2001